Continual tinkering with the lifetime allowance (LTA) in recent years means more and more clients now have pension funds taking them over the limit.

If your client would prefer to transfer defined benefits (DB) which would otherwise remain within the LTA limits, to money purchase funds which will lead to LTA excess charges, is this a deal breaker?

Should the aim be to avoid LTA excess charges at all costs?

Case study - Bevan

Mr Bevan, a widower with non-dependant children, is about to reach age 70 when he wants to fully retire. He hasn’t taken any of his private pensions yet and has the full standard LTA available.

Mr Bevan’s pensions are:

Scheme Type

Current Value/ CETV

Full Pension

Max PCLS

Reduced Pension

Scheme A = DB

£800,000

£32,000

£155,675

£23,351

Scheme B = DB

£450,000

£15,000

£64,285

£9,643

Scheme C = DC with GARs at age 75

£90,000

n/a

n/a

n/a

Scheme D = DC former rebate only plan

£8,000

n/a

n/a

n/a

Source: Prudential

Hearing that these particular DB schemes will only pay a lump sum equivalent to five years of pension income on his death, Mr Bevan is keen to transfer his defined benefits to flexi-access drawdown as he knows this will allow remaining funds to be passed onto his beneficiaries.

If he takes benefits directly from the DB schemes there is no LTA excess. However, the transfer value amounts will lead to LTA excess charges at some point.

There is no way to avoid the charge when benefits are tested and exceed the LTA, at the latest when Mr Bevan reaches age 75. To transfer or not to transfer, this is the dilemma.

What is important to the client?

We don’t have space for a full analysis of defined benefit transfer considerations here but all the usual factors need to be taken into account.

Both the Financial Conduct Authority (FCA) Policy Statement 18/6 and Consultation Paper 18/7 are key to the current rules, with a further policy statement expected in Autumn to watch out for.

What we will look at is, does your client value a secure income, and dependant’s pension over a flexi-access drawdown income pot? Is your client prepared to take a hit on an LTA charge if you can demonstrate how it fits in with their desired outcome?

Options for scheme A

There are three, possibly four, scenarios for taking benefits from this scheme. Let’s work out how much LTA each scenario would use.

1. Leave in DB and take full pension. £32,000 x 20 = £640,000 LTA, using 2018 to 2019 rates this is 62.13 per cent.

Please answer the six multiple choice questions below in order to bank your CPD. Multiple attempts are available until all questions are correctly answered.

What is the current value of Mr Bevan's scheme B?

£450,000

£850,000

£90,000

£8,000

The DB schemes will only pay a lump sum equivalent to how many years of pension income on Mr Bevan's death?

Two years

Four years

Five years

Seven years

Under his options for scheme D: It may be beneficial for Mr Bevan to take this before reaching age 75 when the automatic LTA test takes place and the scheme administrator would deduct the 25 per cent charge from LTA excess funds. True or false?

True

False

Why can Mr Bevan not benefit from FP16?

Because he is a smoker

Because he is not yet age 70

Because he does not want to

Because he has made contributions to scheme C since 5 April 2016

Under scenario one, if Mr Bevan chooses to take the excess of the LTA as a lump sum the scheme administrator would deduct the 55 per cent tax charge of how much?

£119,000

£121,000

£125,000

£128,000

The author suggests transfer might still be a good option if the client wants what?

A lavish retirement

A holiday home during retirement

A flexible retirement

An inactive retirement

Nearly There…

You have successfully answered all the questions correctly, well done!

You should now know…

Understand what is important to the client when advising pension transfer clients.

Learn about the different options available to pension transfer clients who want to avoid the LTA.

Consider what is the right way to use the 100 per cent lifetime allowance.

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